Editor’s note: See correction at the bottom.

Toto, I have a feeling we’re not in Kansas anymore. We’re in California, where the winter weather is in the 70s and the high taxes are imposed by the Great and Powerful Oz.

Writing in Al Jazerra, David Cay Johnston said Kansas’ tax cuts hurt it, while California was helped by its $7 billion in tax increases, which voters approved with Proposition 30 in 2012. He is an investigative reporter, Pulitzer Prize winner and professor of business, tax and property law of the ancient world at the Syracuse University College of Law.

His headline: “Real world contradicts right-wing tax theories.” Subheadline: “California raised taxes, Kansas cut them. California did better.”

He wrote:

“Ever since economist Arthur Laffer drew his namesake curve on a napkin for two officials in President Richard Nixon’s administration four decades ago, we have been told that cutting tax rates spurs jobs and higher pay, while hiking taxes does the opposite.

“Now, thanks to recent tax cuts in Kansas and tax hikes in California, we have real-world tests of this idea. So far, the results do not support Laffer’s insistence that lower tax rates always result in more and better-paying jobs. In fact, Kansas’ tax cuts produced much slower job and wage growth than in California.

“The empirical evidence that the Laffer curve is not what its promoter insists joins other real-world experience undermining the widely held belief that minimum wage increases reduce employment and income.”

Let’s just deal with that.

First, as I seem to be the only one to have pointed out, California taxes actually have declined in recent years, not risen. I wrote in July:

“California taxes have dropped $6 billion in the last two years. That’s because Gov. Arnold Schwarzenegger’s record, $13 billion tax increase of 2009 expired and was replaced in 2012 by Gov. Jerry Brown’s $7 billion tax increase of Proposition 30.

“Net: a $6 billion tax cut.”

Now, guess what? The entire general-fund budget in 2013 for Kansas was $6.2 billion — roughly equal to the California tax cut.

So anything good Johnston says about tax policy in California has to be assigned to the tax cut here, not to an increase that didn’t happen.

‘Temporary tax’

True, from a Lafferite perspective, things would have been even better had Prop. 30 not passed. But in life, you take what you can get. And Gov. Jerry Brown, who campaigned for voters to pass Prop. 30, reminded us in October, “I said when I campaigned for Prop. 30 that it was a temporary tax, so that’s my belief, and I’m doing everything I can to live within our means.”

That’s highly encouraging to California businesses, which can look to an infusion of investments — Prop. 30 mainly is a tax on the wealthy — in a couple of years when the money is shifted back from the wasteful government sector to the productive private sector. Much more than government, businesses are forward looking.

If that happens, and Prop. 30 expires, taxes will have dropped $13 billion under Brown, the biggest tax cut of any state in history.

And if in 2016, Brown makes a fourth bid for president, all that will make for a compelling part of his “California is back [because of me]” narrative. Indeed, the Kansas governor’s own victory could put him in contention for the GOP nomination. How about a 2016 contest of Brown vs. Brownback?

By the way, it was Laffer who designed Brown’s supply-side, flat-tax proposal, a 13 percent income tax on everyone, during the governor’s 1992 presidential bid. So Brown, hardly the “right wing” partisan Johnston thinks goes for cutting tax rates, is well aware of supply-side economics.

Laffer also helped design California’s Proposition 13 tax cuts in 1978; and Ronald Reagan’s tax cuts that propelled more than two decades of strong American growth, until the unfortunate Bush-Obama policies of recent years. Laffer currently heads the Laffer Center for Supply Side Economics at the Pacific Research Institute, CalWatchDog.com’s parent think tank.

I recently reviewed, “The Pillars of Reaganomics: A Generation of Wisdom from Arthur Laffer and the Supply-Side Revolutionaries,” edited by Brian Domitrovic.

Supply-side

Johnston explained:

“Laffer’s model illustration looks like a bullet pointed to the right. It shows that the government collects no revenue when tax rates are at 0 or 100 percent. As tax rates rise, revenue does until reaching an unspecified rate that Laffer calls “prohibitive.” Above that level, as tax rates rise, government revenues fall off quickly.”

But this seems pretty obvious, doesn’t it? If the income tax were 100 percent, would you work? Of course not, except on the black market. What would be the point? (The Laffer Curve graphic he kindly linked to is from Laffer’s own site, and is reproduced nearby.)

Johnston wrote:

“Laffer qualifies many of his assertions about changes in tax rates, noting that tax cuts may result in less government revenue, for example.”

Right. As you move down the lower part of the Laffer Curve, the white area, both tax rates and revenues drop. Taxes at a 0 percent rate obviously raise 0 dollars. (Unless the good professor volunteers to send the treasury a check.)

Kansas vs. California

Johnston continued:

“But on one issue from the Laffer curve, he is absolute:

“Tax rate cuts will always lead to more growth, employment and income for citizens, which are desirable outcomes leading to greater prosperity and opportunity.”

This is where the Sunflower State vs. Golden State rivalry comes in, an economic version of the Kansas State Wildcats vs. the UCLA Bruins at the Valero Alamo Bowl on Jan. 2.

“Is this absolute rule right?” Johnston asked. “Let’s consider the tax law changes in Kansas and California that took effect at the start of last year [2013; although Prop. 30 actually was retroactive to Jan. 1, 2012].”

He recounted how Gov. Sam Brownback ran for office in 2010 “to turn the state into a low-tax paradise and eventually to eliminate the state income tax….The Brownback administration paid Laffer $75,000 for his advice on the tax cuts.” Effective in 2013, “The bottom rate was cut from 3.5 percent to 3 percent. The top rate, which starts at $15,000 of taxable income for singles, was lowered from 6.25 percent to 4.9 percent.”

Imagine that! A politician who actually kept the campaign promise under which people elected him. Indeed, Brownback last month was re-elected, despite concern that his tax cuts caused budget deficits. The Kansas City Star reported:

“After he addressed his supporters, Brownback told The Star he looked forward to the next four years.

“’We’ve done the hard things,’ he said. ‘Now we can do the things that we want to do. We can invest in education growth because we’ve made the tough decisions. Now we can work on issues like poverty and water because we’ve made the tough choices.’

Brownback also plans on reducing Kansas’ deficits by cutting waste, which as everywhere in government is larded as thick as on a holiday hog.

And with Brownback and his tax cuts now firmly entrenched, Kansas businesses can plan their prosperous futures. I suspect, just as Laffer’s theory predicts, the prosperity will increase the tax base, thus providing higher taxes which also will close the deficit.

“The same month the Kansas tax rate cuts began, tax rates rose in California,” Johnston wrote. But as we have seen, looked at in a slightly larger perspective, California’s taxes dropped $6 billion — which helped that other tax-cutting governor, Jerry Brown, also win re-election.

Bond rating

Johnston brought up state bonds:

“Moody’s Investors Service lowered the state’s credit rating after the $800 million of tax cuts took effect, a move Brownback dismissed as telling more about Moody’s policies than Kansas’ finances. Later Standard & Poor’s also downgraded Kansas bonds, citing ‘a structurally unbalanced budget,’ in which taxes were cut more than spending.”

He also could have cited how California’s bond rating was upgraded right after voters just passed Proposition 2, the “rainy day fund” initiative.

Except that, despite these changes, Kansas still has higher bond ratings. California’s S&P bond rating rose to “A-plus” from “A.” S&P defines that as, “Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.”

Kansas’ S&P rating, from the August downgrade, went to “AA-minus” from “AA.” S&P defines that as — note the lack of a cautionary note — “Very strong capacity to meet financial commitments.”

As to Moody’s, it rates California’s bonds “Aa3,” but Kansas’ higher, at “Aa2.” Both “Aa” ratings are defined as, “Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.”

On bonds, Johnston summarized, “California’s credit rating improved. The Golden State can borrow at lower rates, while Kansas will have to pay more to compensate investors for the risk that the Sunflower State will lack the revenue to repay its debts.”

Except that Kansas’ rates still are lower that California’s and it will “have to pay” less overall “to compensate investors.”

Jobs

Folks care most about jobs. Johnston compared the two states:

“From January 2013 through September 2014, the latest data, California grew jobs at 3.4 times the rate of Kansas. Total nonfarm payroll jobs in Kansas increased 2.1 percent, in California 7.2 percent.”

He provided a nice graph:

Except that, as of October this year, Kansas’ unemployment rate was just 4.4 percent, 10th best of all the states and D.C.; compared to 7.3 percent in California, 47th best (4th worst).

According to Businessweek, “In the U.S. a full-employment economy more realistically is closer to the 3 percent to 4 percent mark….”

So Kansas is close to “full employment.” Those without jobs basically are between jobs. Or looking for Dorothy.

Employment can’t go up faster because everybody already has jobs. It’s like when your teenage son stops growing at 18, you don’t complain that he doesn’t keep rising to 10-feet tall.

So for working stiffs in Kansas, the Laffer-Brownback tax cuts worked!

Compensation

One area Kansas seems to lag is in compensation. Johnston wrote, “Compensation in California also grew faster than in Kansas. California’s average weekly wage of $1,165 in the first quarter of this year was 13.4 percent higher than in mid-2012, while the Kansas average of $840 was up only 10.1 percent.”

Except that, for the second year in a row, according to the U.S. Census Bureau, California suffers the nation’s highest poverty rate when the cost of living in this incredibly expensive state is taken into account. Part of the reason is that California’s high taxes, with the shocking 9.3 percent income tax rate digging in at about $55,000 of earned income, also gouge the middle class.

A shocking 8.9 million of our 38 million residents languish in poverty, or 23.4. That 8.9 million is three times Kansas entire population of 2.9 million.

By contrast, just 11.8 percent of Kansans are in poverty, less than half California’s percentage.

Education

Taxes go somewhere. The biggest item in both states’ budgets is education. In California, we even have an initiative, Proposition 98, which mandates about 40 percent of general-fund taxes go to public schools. And the Prop. 30 tax increase largely was justified as benefiting K-12 school kids.

According to the National Assessment of Educational Progress, “In 2013, the average score of fourth-grade students in Kansas was 223. This was higher than the average score of 221 for public school students in the nation.” But just barely higher. It was middling, causing Brownback to seek further reforms.

NAEP found for California, “In 2013, the average score of fourth-grade students in California was 213.” That was 8 points below the national average of 221; and it was 10 points below Kansas’ 223 average.

So, for all California spends on education, and all the high taxes Johnston says benefit us, our kids’ score worse than in low-tax Kansas.

As EdSource reported of the 2013 scores:

“California students performed about the same in reading and math on this year’s National Assessment of Educational Progress as they did in 2011, ranking among the 10 lowest performing states in the country.

“Results from this year’s assessment show that only 33 percent of California 4^th grade students and 28 percent of 8^th graders are proficient or better in math. In reading, 27 percent of 4^th graders and 29 percent of  8^thgraders are proficient or better.”

Conclusion

I’ll skip Johnston’s discussion of minimum-wage boosts, which he thinks will help California. With the wage going up even further due to initiatives in four states and three California cities, and more to come in 2016, we’ll soon have some really good comparisons on that. (My earlier articles on it are listed here.)

But just one more thing, as the late Steve Jobs used to say. Johnston wrote, “Tax hikes did not hurt California job growth because the taxes were not on jobs but on high incomes.”

Once again — strike up the band — taxes have gotten lower in California. But as to the Prop. 30 income taxes only on “high incomes,” when “the rich” pay more in taxes, all of us suffer, too. Because it’s largely the rich who use their money to invest in creating new businesses and jobs, as well as fund numerous charities.

Johnston concluded:

“Ultimately, real world results trump theory. Actual changes in the number of jobs and what they pay should be used to set policy, not ideology, assumptions and expectations…. Time will tell. The important thing is that policy should follow the facts, no matter where they go.”

Yep.

Correction: This piece originally had Kansas’ Moody’s rating downgraded to Aa1; in it was fact one notch lower, at Aa2, to which the text has been changed. We regret the error. We were informed of this by David Jacobson, AVP, Communications Strategist-Public Finance Group at Moody’s Investors Service. He wrote, “In spring of this year we downgraded Kansas from Aa1 to Aa2, and in June we upgraded California from A1 to Aa3.  So the correct rating on Kansas is Aa2, and although the states are moving in different directions, Kansas does remain one notch higher than California.  Our median state rating is Aa1.”

Now the Democratic Legislature is passing tax cuts for their buddies in the military-industrial complex:

“The California Assembly on Thursday approved a fast-tracked proposal to provide up to $420 million in tax breaks over 15 years for the aerospace industry.

“The bill by Assemblyman Steve Fox (D-Palmdale) would offer credits for an ‘advanced strategic aircraft program.’ The credits would be capped at $25 million annually the first five years, $28 million per year for the next five years and $31 million annually for the final five years.

“The tax credit program would expire after 15 years.

“The tax credits, should they go into effect, could help boost the chances for aerospace companies, such as Lockheed Martin, that are bidding for contracts for the Defense Department’s Advanced Strategic Aircraft Program.

“‘We need to pass this tax credit to make California bidders have a more competitive edge in the bidding process,’ Fox said.”

OK. Fair enough.

But that’s true for the rest of us as well. Everyone knows other states are “bidding” for our jobs and businesses with lower taxes and regulations. Toyota just moved its HQ to Texas.

So what we all need is tax cuts. How about starting by cutting the income tax in half for everybody?

By John Seiler

If I got paid $1,000 for every time I refuted a phony government study, I’d be as rich as that socialist billionaire, Warren Buffett.

The latest phony study comes from the “non-partisan” — meaning pro-big government — Congressional Research Service. It supposedly says cutting tax rates didn’t stimulate the economy.

I even can write the refutation by memory.

After World War II, in 1946, everyone feared the Great Depression would return. Instead, taxes were cut sharply and the economy took off. Click here for a study on the boom.

In 1964, the Democratic JFK-LBJ tax cuts were enacted, dropping the top income tax rate from 91 percent to 70 percent, and the economy zoomed in one of the greatest booms ever. The details even are in liberal Robert Caro’s latest volume of his LBJ biography, “The Years of Lyndon Johnson: The Passage of Power.”

In 1981, Ronald Reagan cut the top tax rate from 70 percent to 50 percent, effective 1983. In 1983, the economy soared. In 1986, he cut the rate again to 28 percent, and the recovery kept soaring.

In 1996, Bill Clinton — yes, another Democrat — cut the top capital gains tax rate from 28 percent to 20 percent and fueled the dot-com boom.

In 2001 and 2003, President George W. Bush cut the top income tax rate from 39.6 percent to 35 percent; and the top capital gains tax rate from 20 percent to 15 percent. The economy grew strongly — but only for a couple of years. Unfortunately, Bush made serious mistakes in other areas. The taxes were temporary, hence the impending “fiscal cliff” we face on Jan. 1. He went on wild spending binges that ended the Clinton surpluses he inherited. He allowed Fed Chairman Alan Greenspan to debase the dollar. And he goosed the housing market, leading to a boom-bust cycle and the 2008 crash.

In January, we’re likely going to see some hefty tax increases at the federal level; and tax increases already have been imposed in California.

So in 2013 we’ll see whose theory is right, mine or that of the Congressional Research Service. Here’s a bet, which will be effective only if the CRS contacts me. If the tax increases spur the economy, as the CRS contends, then I’ll shave my head. If the economy fails to ignite, then the CRS goes out of business and refunds the money it wastes to taxpayers.

By John Seiler

I enjoyed Bill Clinton’s speech last night. He’s still Slick Willie. After his bypass, he’s a little more fatigued than he was when he occupied the White House. But he still has that Clinton charm that seduced 44,909,806 voters in 1992, 47,401,185 in 1996 and Monica Lewinsky.

As usual, he was a little fast and loose with the facts. But he rightly has bragging rights over the prosperity of the late 1990s. Here’s how he said it was done:

“People ask me all the time how we delivered four surplus budgets. What new ideas did we bring? I always give a one-word answer: arithmetic.”

He got a laugh there.

“If they stay with a 5 trillion dollar tax cut in a debt reduction plan — the — arithmetic tells us that one of three things will happen:

“1) they’ll have to eliminate so many deductions like the ones for home mortgages and charitable giving that middle class families will see their tax bill go up two thousand dollars year while people making over 3 million dollars a year get will still get a 250,000 dollar tax cut; or

“2) they’ll have to cut so much spending that they’ll obliterate the budget for our national parks, for ensuring clean air, clean water, safe food, safe air travel; or they’ll cut way back on Pell Grants, college loans, early childhood education and other programs that help middle class families and poor children, not to mention cutting investments in roads, bridges, science, technology and medical research; or

“3) they’ll do what they’ve been doing for thirty plus years now – cut taxes more than they cut spending, explode the debt, and weaken the economy. Remember, Republican economic policies quadrupled the debt before I took office and doubled it after I left. We simply can’t afford to double-down on trickle-down.”

“Double-down on trickle-down”: great slogan. Democrats often accuse Republicans of “trickle-down” economics, meaning rich folks get the best tax breaks, then a little of that money “trickles” down to the middle-class and the poor.

Except he didn’t mention that House Speaker Newt Gingrich and the Republican House and Senate worked out the budget cuts with him after they won the 1994 congressional elections. If Democrats would have controlled Congress in the late 1990s, there would have been no surpluses.

And, true, Clinton and the Democratic Congress in 1993 increased taxes. But it was a small increase, and the last he would ever pass.

And he didn’t mention that after 1994, he — William Jefferson Clinton, 42nd president of the United States — cut capital gains taxes three times. That encouraged investment in American companies, especially propelling the dot-com boom of the time. More economic growth meant a bigger tax base, which in turn helped cut the deficits to zero, then produce surpluses.

Most capital gains tax go to rich investors, who then use the money to create new businesses and jobs. It was Clinton himself who enacted “double-down on trickle-down.”

Slick Willie. Gotta enjoy his performance. Gotta also check everything he says. It’s arithmetic.

JUNE 28, 2011

By JOHN SEILER

Assuming Republicans in the Legislature stand solid, Californians could get an early Independence Day gift this year: tax cuts. And that gift will provide a needed boost to the state economy.

On July 1, the car tax drops by half a cent, from 1.15 percent to 0.65 percent. So, someone owning a $25,000 car will save $125. A two-car family with similar cars would save $250.

The state sales tax also will drop by 1 percentage point, from 7.25 percent to 6.25 percent. (Some counties also impose an additional sales tax on top of either rate). So a family spending $10,000 a year on taxable sales – school books, kids’ clothing, pipes for plumbing repair, etc. – would save $100 a year.

If one of those $25,000 cars mentioned above is bought (instead of already owned), the family would save another $250.

But let’s also throw in the tax that expired six months ago, on January 1. The state income tax dropped 0.25 percentage point, from 9.55 percent to 9.3 percent for the “top” bracket, which in California kicks in at only around $50,000 a year in taxable income. We suffer the most progressive – meaning anti-middle class – tax structure in the country.

That means a dual-income family making $100,000 a year would have $50,000 a year taxed at the “top” rate. The tax cut then would saved the family $125 a year. (There’s an additional “extra top tax,” as I call it, an income tax surcharge of 1 percent for millionaires from Proposition 63, to fund mental health care; the tax will continue.)

Let’s add it up: The middle-class family in the above examples will save $750 a year.

That’s not chump change. It could buy music lessons for a budding Mozart or Dylan. Or maybe needed roof repairs. It might be invested in a 401(k) to provide retirement security. Or it might provide seed money for a new business.

Positive Tax Cuts

“The tax cuts will definitely be positive,” Esmael Adibi told me; he’s director of the A. Gary Anderson Center for Economic Research at Chapman University. “The 1 percentage point sales-tax cut should induce buying. Although, at the beginning, people won’t notice it. But in the long run, some will think, ‘Maybe now I can afford that new car.’ There’s no question it will be positive. What many people forget is that, when you make something cheaper, people will buy more of it.”

The economy sure could use some help. Just last week, Chapman released its latest California Economic Forecast, which I attended in Costa Mesa. The Forecast foresees sluggish California growth, at best, with dropping housing prices the next two years. Some positive signs are increased exports to other countries and a positive attitude among most purchase managers.

But jobs growth will be sluggish.  California lost about 9 percent of its jobs during the 2007-09 recession – 1.4 million jobs. Every one with a face and a story to tell.

But jobs growth will be only 216,000 for 2011 and 290,000 for 2012, making up only about a third of the jobs lost.

One of the most important things about taxes is an intangible: What do people expect will happen next? The 2009 tax increase was signed into law by a Republican governor, Arnold Schwarzenegger, who had pledged in his 2003 race for governor not to increase taxes.

Attacking soon-to-be-recalled Gov. Davis’ car tax increase, Arnold said then, “All they have done is spend, spend, spend, and when they realize they spend money they don’t even have, then it is tax, tax, tax. How crazy is that going to be to come up with this crazy idea to raise the car tax by 300 percent? We’re not going to let it happen. Let me tell you something…. It’s going to hurt the person who is a low-income person who makes $15,000 to $20,000 a year. The person who is struggling to make ends meet. A person who is struggling to put food on the table for their family.”

He was right in 2003. And wrong in 2009. Perhaps he was distracted by the personal problems that boiled over in 2011.

In any case, the message from Arnold in 2009 was clear: Even Republicans support tax increases. There’s no refuge for taxpayers except to leave the state. Taxes might go up even more. His tax increases worsened the recession in California, hurting tens of thousands of people.

Late 1990s Economic Boom

Compare that with what happened when the last of Gov. Pete Wilson’s $7 billion in tax increases of 1991 finally expired in 1995. In 1994, state Sen. Rob Hurtt predicted that California, which was lagging the national recovery, would boom starting in 1995. He was right. The dot-com boom that ensued was undergirded by a rare California example of tax restraint. I recently tried to contact Hurtt, an Orange County businessman, for some perspective on the current situation, but his office said he no longer comments on politics.

The point is that the message in 1995 was clear: Taxes are going down. They’re not going back up, at least for a while. California is open for business again.

Today, if California Republicans in the Legislature have the guts to Stonewall any tax increases of any kind – from Gov. Jerry Brown, the Democratic Legislature, or the Man in the Moon – California’s economy will be given a shot of needed adrenaline. People and businesses will have more money to spend and invest. And the intangible message will be: Even when Democrats run everything, they can’t increase taxes.

Perhaps then we’ll begin to catch up with the national recovery. And if there’s the second dip of a double-dip recession, the last thing California wants to have is even higher taxes – and the reputation for continually increasing them.

I’m not going to light any fireworks until my tax cut is jingling in my pocket. But Republican steadfastness in protecting the July 1 tax cuts could make July 4 sparkle even brighter this year.

By JOHN SEILER

In the hullabaloo over extending tax increases, one thing is being overlooked: As things now stand, on July 1, just 10 weeks away, California gets some pretty hefty tax cuts. You’ll have more change jingling in your pocket.

That’s when most of Gov. Arnold Schwarzenegger’s record $13 billion tax increases of 2009 expire. (The 1 percent income tax increase of that year already expired on Jan. 1.)

Overall, combining the Jan. 1 and July 1 tax increases, the average California family will have about $1,000 more to spend on food, children’s clothing, mortgage or rent payments, car payments, gas, charity, etc. Some of the tax cuts also will go into investments to create new businesses and jobs.

The following tax increases will cease as of July 1:

* 1 percent sales tax increase;
* 0.5 percent Vehicle License Fee increase (the “car tax”).

Spurring Sales

At the end of a tax-increase period, people generally postpone some economic activities until the tax expires. For example, someone wanting to buy a $30,000 today can, by waiting until July 1, save 1 percent on sales ($300) and 0.5 percent on the car tax ($150). Total savings: $450.

That means sales will be suppressed in the next few weeks, but will take off on July 1.

We won’t know until a few months from now how many new sales will be generated by this savings, but it could be substantial.

Moreover, even if you aren’t in the market for a new car, you’ll see savings on the VLF. If you old flivver is worth $10,000, you’ll pay $50 less on the VLF. Maybe your spouse has another car worth $10,000, and one of your kids has another worth $10,000. Total family savings: $150.

Marginal Tax Rates

Another factor is marginal tax rates. At some point, tax rates become so high that people stop certain economic activities. That point differs with different people.

Conversely, at some point, tax rate cuts generate more activity. If the taxes on that $30,000 car are cut by $450, it well could make affordable something that previously was beyond your reach.

The additional economic activity, in turn, actually generates taxes — even at the lower rates. That’s because, unless the purchase is made, the car dealer doesn’t get the sale, so he doesn’t pay the business tax. The salesman doesn’t get a commission, and so doesn’t pay income tax on the commission. And the sale, not being paid, doesn’t pay any sales tax at all.

However, if the tax cut makes a product more affordable, and thus generates a new sale, then all those taxes listed above are paid.

“Of course it will increase sales,” Esmael Adibi told me of the expected July 1 tax cut; he’s director of the A. Gary Anderson Center for Economic Research at Chapman University. “A 1 percent sales tax cut makes big-ticket items, such as cars and boats, more affordable. It will stimulate durable goods purchases.”

He added, “Generally speaking, if you pay less in sales taxes and the VLF, you have more money in your pocket. A good amount will be spent.”

Budget Dilemmas

The tax cuts would mean that the state budget would have to be cut more than was planned in Gov. Jerry Brown’s January budget. State workers would have to be laid off. “Cutting spending would be negative” on the state economy, Adibi said. However, he added, the overall effect would be positive because “the reduction in taxes affects a larger group of the population than would the spending cuts.”

Another factor is the predictability of taxation. Business managers always insist that the predictability of the tax code is essential to smooth operations. If the Schwarzenegger tax increases expire on July 1, that would be a plus for businesses. But if different taxes later are increased, the uncertainty generated — as well as the new taxes — would be a negative. Among the uncertainties:

* The California Teachers Association now is pushing a tax increase without a direct vote of the people. The CTA is a close ally of Gov. Brown and the Democratic majority in the Legislature.

* Assembly Speaker John Perez, D-Los Angeles, is pushing a new tax on wealthy Californians.

* A $2 billion yearly severance tax on oil production is being advanced. It also would increase gas prices at a time when prices paid by drivers are approaching $5 a gallon.

So, the predictability of California tax rates remains volatile.

Other Economic Factors

It’s worth remembering that something similar happened in the past. After Republican Gov. Pete Wilson increased taxes a then-record $7 billion in 1991, during the height of a recession, California did not enjoy the national economic recovery that the rest of the country soon was enjoying. It stagnated until, in 1995, most of the tax cuts finally expired and the Golden State economy roared into the prosperity of the late 1990s.

Adibi pointed to some additional benefits of the pending July 1 tax cuts. “Clearly, the sales tax is a very regressive tax,” he said, hitting the poor more than the wealthy. A wealthy person might pay a high sales tax on a new Mercedes. But it’s the day-to-day purchases of a poor person — children’s clothing, a new muffler for an old car, over-the-counter medicine — on which a high sales tax can add up. Conversely, a sales-tax cut can mean a great deal to a poor person.

Adibi also warned that higher gasoline prices are washing out most of any benefit we might get from tax cuts. “So we’re getting it from every front,” he lamented.

Perhaps the gas increase is not felt by Gov. Brown and California Legislators, for whom cars and gasoline are supplied by taxpayers. But for most Californians, extending the Schwarzenegger tax increases would be a doubling of the heavy new burden of higher gas prices.

By contrast, any chance that California’s struggling economic recovery has to be sustained rests on maintaining the tax cuts beyond July 1.